Tag: Risk Pools

The “repeal and replace” debate has created more confusion than clarity. Cutting to the heart of it, the question is: “How do you incentivize young and healthy people to buy health insurance?”

Health insurance seems so complicated: different plans, deductibles, out-of-pocket costs, premiums, enrollment periods. So many companies, so many options, so little time.

The American Health Care Act (AHCA) will be voted on in the House tomorrow.

Here is an effort to explain in simple terms the essential weakness of the AHCA, which has become known as “Trumpcare.” It is the same weakness that has plagued the Affordable Care Act (“Obamacare”).

In summary, both assume the costs of health insurance and health care will come down over time if more people are incentivized to buy health insurance. The difference is in the form of the incentive. How how do you get more people to participate? Negative incentive or positive? Stick or carrot?

Obamacare uses the stick. Trumpcare, the carrot. Both depend for success on which kind of incentive works best to get the most people to get with the program.

Why is it important to have more people participate? It has to do with the spreading of risk and cost.

Insurance is simply a financial tool to do that–spread risk and cost. Car insurance is a familiar example to those fortunate to have a car. The law requires everyone who drives (good driver or bad) to have car insurance. You may never have an accident, but your premiums go to help share the costs of those who do.

Health insurance plans do the same. They allow us to shift our individual health risk and cost to insurance companies, which then spread the risk to a larger population of participants (so called “risk pools”). Our own risk pool may include fellow workers (through employer-sponsored plans) or fellow citizens who buy on the state sponsored exchanges.

The larger and more diverse the risk pool, the further the risk is spread and the lower the costs of insurance should be to each participant, which brings us back to the central challenge faced by both Obamacare and Trumpcare.

Under Obamacare, if everyone without employer sponsored insurance had bought health insurance on the exchanges, premiums would be lower, mainly because younger and healthier people diversify the risk.

To put it another way, if younger and healthier people do not join the pool, or opt out, aggregate and individual premiums rise, because the risk ends up being shared only among an older, less healthy group.

This, in fact, was the cause of the premium increases in the Obamacare exchanges. Younger and healthier people opted out of the risk pools because it was less expensive to pay penalties than remain in the pools.

This problem also threatens Trumpcare, and it will continue to be a subject of debate. Instead of forcing participation (with the combination of mandates, penalties and subsidies) the AHCA hopes to attract younger, healthier people to participate by providing tax incentives (no mandate or penalty*). Carrots instead of sticks.

[* Trumpcare will have a 30% “penalty” (a premium surcharge) for a lapse in coverage. This will be payable to the insurance companies. They need the money.]

The challenge in both cases (Obamacare and Trumpcare) is that to maintain the now popular features of Obamacare–mandating coverage for those with pre-existing conditions and making health insurance affordable for more people–it is critical to have the participation of the younger and healthier crowd.

Obamacare mandates participation. Trumpcare bets younger, healthier people will opt for health insurance at the right price. This also assumes young and healthy people will be rational about their health care decisions and lose their “what-me-worry” attitudes of invincibility. If they buy health insurance only when they finally get sick, Trumpcare (and the country) will suffer a fate worse than Obamacare.

The what-me-worry attitude is just too familiar and too pervasive. The Trumpcare switch to a “free market,” hold-out-the-carrot set of incentives is bound to fail. Health insurance and healthcare costs will continue to spiral. Tens of millions will lose insurance.

It is no surprise that a senior officer of the American College of Physicians, which represents 148,000 doctors and medical students, on Monday said he had “never seen a bill that will do more harm to health.”